Hewlett-Packard Is A 'Value Trap' That Is Worth Buying Now

In July, a high-profile investor named Jim Chanos said that he was short Hewlett Packard (NYSE:HPQ) shares at the Delivering Alpha Conference. He said the stock was "the ultimate value trap" and was reportedly hedging this short position by going long Microsoft (NASDAQ:MSFT). Since that time, both Hewlett Packard and Microsoft are down by about $1 per share. Those are not exactly headline-making investment results. Besides, many tech stocks have dropped over concerns about the global economy, reduced government spending, and the popularity of tablets which has mostly benefited companies like Apple (NASDAQ:AAPL). Furthermore, other tech stocks have been much better to short in the past several weeks. For example, Intel (NASDAQ:INTC) was trading around $26 per share in July and it now trades around $22.

While many investors have left stocks like Hewlett Packard for dead, or have even initiated a short position, it seems like they could be late to the party. Sure, at $30 or $40 per share, Hewlett Packard was a great short, but at around $17, the stock trades at about 4 times earnings. That could be one of the cheapest tech stocks in the market. While the PC market has seen demand reduction, the concerns appear to be exaggerated. Just take a look at earnings estimates for Hewlett Packard for 2012 and 2013, which respectively come in at $4.05 and $4.18, and it is increasingly clear that earnings are not exactly about to drive off a cliff.

Hewlett Packard shares are increasingly attractive for income investors as the stock now yields about 3%. The company has been raising the dividend and thanks to a low payout ratio, it has plenty of room to raise it further. A new trend to increase the dividend in June of each year seems to be emerging. For example, the quarterly dividend was 8 cents for a number of years, but in June 2011 and June 2012, the dividend was raised significantly. The company now pays 13.2 cents per quarter, which is an increase of about 70% in just a couple of years.

In hindsight, I believe the "death of the PC industry" type of remarks and headlines, and seeing a prominent investor like Jim Chanos short Hewlett Packard will actually turn out to be signs that we might be at or near the lows. As they say, no one rings a bell at the bottom, but the type of extreme negativity against Hewlett Packard, might just be the bell ringing.

Hewlett Packard shares are so undervalued that some analysts and industry observers now believe it could be a takeover target. A recent Forbes article states that a takeover by Oracle (NYSE:ORCL), could make sense in order for it to acquire the higher margin divisions and possibly spin-off the PC and printer business.

Investors who buy this "value trap" will be forced to accept a 3% yield, with a strong chance of another substantial dividend increase next June. They might also have to endure being "trapped" in a stock that could easily surprise to the upside as well as one that could be either be bought out by the likes of Oracle, or see a spin-off of assets to create shareholder value. That sounds like a good "trap" to be in if you ask me. It's worth noting the Microsoft and Hewlett Packard both yield about 3.1%, but beyond that, Hewlett Packard excels, as it is expected to earn significantly more in 2012 and 2013, all for nearly half the price of Microsoft shares. Perhaps, Jim Chanos should have bought Hewlett Packard and shorted Microsoft, which has reportedly seen bugs in the Windows 8 operating system, just before an important launch.

Here are some key points for HPQ:

Current share price: $17.06

The 52 week range is $16.23 to $30

Earnings estimates for 2012: $4.05 per share

Earnings estimates for 2013: $4.18 per share

Annual dividend: 53 cents per share which yields 3.1%

Here are some key points for MSFT:

Current share price: $17.06

The 52 week range is $24.26 to $32.95

Earnings estimates for 2012: $3.01 per share

Earnings estimates for 2013: $3.30 per share

Annual dividend: 92 cents per share which yields 3.1%

Data is sourced from Yahoo Finance. No guarantees or representationsare made. Hawkinvest is not a registered investment advisor and doesnot provide specific investment advice. The information is forinformational purposes only. You should always consult a financialadvisor.

Disclosure: I am long HPQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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